Core inflation takes unexpected dip

Customers check out at a new Aldi grocery store in Tyler, Texas, last week. The U.S. Labor Department said the rise in consumer prices, a gauge of inflation, slowed in August.

A gauge of underlying U.S. inflation unexpectedly cooled in August as apparel prices fell by the most in about seven decades and medical-care costs declined, suggesting little urgency for the Federal Reserve to speed up the pace of interest-rate increases.

Excluding food and energy costs, the core consumer price index rose 2.2 percent in August from a year earlier, compared with the 2.4 percent median estimate of economists surveyed by Bloomberg News, a Labor Department report showed Thursday. The broader consumer price index slowed to a 2.7 percent annual gain from 2.9 percent.

Yields on 10-year Treasury notes and the dollar were lower, while stocks rose, as investors weighed the outlook for Fed interest-rate increases after the data were announced. While the moderation partly reflects a near-record 1.6 percent monthly drop in apparel prices, a component that tends to be volatile, the broader slowdown follows a surprise decline in producer prices and suggests the path of inflation could be softer than some people expect.

The single largest expenditure -- housing -- saw related expenses climb 0.3 percent in August and 3.4 percent annually. Gas prices jumped 3 percent last month and 20.3 percent on the year. Food costs ticked up just 0.1 percent last month. Clothing prices plunged 1.6 percent last month, while new vehicle costs were unchanged, the first month without a gain since April; used cars and trucks rose 0.4 percent.

"The broader trend in inflation is that it's moved higher from where it had been, but any worry of an outbreak or idea that inflation will break out -- this data casts some doubt on that," said Kevin Cummins, senior U.S. economist at NatWest Markets.

At the same time, "I'd look past the weakness" in retail prices, Cummins said, adding that the report "doesn't really change the calculus from the Fed's perspective -- it keeps them on a gradual pace" of rate increases.

Fed policymakers are widely expected to raise interest rates later this month and have also penciled in a fourth move this year, though a more persistent slowdown in inflation could affect their outlook. Freight costs and rising wages, along with tariffs and counter-levies, may keep putting upward pressure on inflation. The Fed will publish officials' updated economic and rate forecasts on Sept. 26.

In positive signs for the economy, a separate Labor Department report on Thursday showed that filings for unemployment benefits fell last week to 204,000, an almost 50-year low, underscoring a tight job market. The Bloomberg Consumer Comfort Index rose for the first time in five weeks.

The cooling of price gains, along with what last week's jobs report showed was the fastest wage increase since 2009, meant inflation-adjusted hourly pay rose 0.2 percent from a year earlier, after a 0.1 percent decline in July.

The index for medical care fell 0.2 percent for a second month. The shelter category, which accounts for about one-third of the consumer price index, showed a 0.3 percent gain, in line with recent increases. Prices of new automobiles were unchanged

Airfares rose 2.4 percent after a 2.7 percent advance in July, as fuel prices increased, one of the biggest costs for airlines.

The Fed's preferred gauge of inflation -- a separate consumption-based figure from the Commerce Department -- came in above the central bank's 2 percent goal in July, and the figure tends to run slightly below the Labor Department's consumer price index. August numbers are due on Sept. 28, after the Fed's two-day meeting.

The consumer price index is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rent.

Information for this article was contributed by Katia Dmitrieva, Chris Middleton and Nancy Moran of Bloomberg News and by Josh Boak of The Associated Press.